How much money do you want to have in the long run of your retirement?Today, Jeremy Keil teaches you how to plan for what you want in retirement through long-term investing. This is a must-listen episode for every investor who wants to learn how to manage risk, diversify their portfolio, and avoid falling into familiarity bias.
In this episode, you’ll learn:
What to consider when saving for long-term retirement funds
How to focus on what you can control
Why it is important to know your current risk tolerance
What it means to diversify your investments and level out your risk
Why rebalancing your funds is important and what you should consider
Join Jeremy now to learn investment strategies that will help you get what you want in the long run of your retirement.
Keil Financial Partners | Episode 6: How Will You Fill the Gap Between What You’re Making and Spending in Retirement? | 6 Questions Retirees Aren’t Asking But Should Be | 3 Keys You Should Know Before Choosing a Financial Advisor | Subscribe
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Retirement Revealed Episode 7: What Do You Want In Your Retirement Future?
Are you ready to uncover your retirement solution? Learn more as Jeremy Keil and his guests guide you along the path of retirement and reveal the five steps you need to take to solve your retirement puzzle. Now onto the show!
Aric Johnson: Hello and welcome to Retirement Revealed with Jeremy Keil. Today we're going to be talking about “want”. I believe this is actually part five of a five part series. Is that right, Jeremy?
Jeremy Keil: Well, it's actually part four. We're getting there.
Aric Johnson: All right, so we're covering want today. I mean, everybody wants something. It’s a pretty broad topic. What are we going to focus on?
Jeremy Keil: We're talking about what you want in the future and how you are going to get that. A lot of times when you're younger and saving for retirement, you want to have some money in retirement, and you invest in the stock market and more long-term types of investments. We figure just because you're retiring doesn't mean you don't want anything anymore or that you don't want a future anymore. It’s the opposite. Before you had a long-term and some growth investments. When you hit retirement, you still need both of those things.
Aric Johnson: Yeah, badly. You’ve got to have that or else you put yourself at risk. So interesting. All right. Wanting the future. I like that.
Jeremy Keil: Yeah. We try to boil down each of the five steps into five different words. We could've gone with long-term because we're talking about how long-term money can grow, but we decided to call it want because you want money in the future, but you don't have it yet. If we emphasize that this is a want, then it emphasizes that it's not guaranteed. Your money is not guaranteed to grow. It just probably will, and we need to set your investments up so that when the market goes up or down you understand how you are going to react.
Aric Johnson: Yeah, I think this is perfect because we want security when we're older. That doesn't mean we're always going to have that. We want good health in the future, but it doesn't mean we're always going to have that. So this falls in line with all of that. I think it’s a great topic for today.
Jeremy Keil: Yeah. That’s what we are looking at. It's not like the old days where you maybe invested in the stock market while you were working, you hit retirement, you take your pension, you take your social security, then you go and buy a bunch of CDs at the bank, and you start living on that interest rate. That's just not how it works anymore.
Aric Johnson: All right, so how does it work?
Jeremy Keil: Well, it's such a low interest rate situation that you just can't rely on things that have interest such as those bonds or CDs. You can't rely on that for the long-term. That's great for the short term, and that's what we think you need. That's what we called the third part of this five part series: what do you need? Once you've decided how much money you need to have set aside for that short, you need to start looking at the long run. When it comes to the long run, it's pretty well documented that the stock market will outperform over time. It's been like that for ages. The problem is that it doesn't do it day to day, but the market happens to historically beat other investments over time. We want to help you figure out how much risk you want to take in the stock market and help you figure out which investments to look for.
Aric Johnson: Yeah, I remember having a conversation with one of the young men that I worked with who actually lived with my wife and I when we worked at Boystown. We were talking about investing and things. He had no concept of investing because he had never been introduced to it. We were just talking about it, and we both had an account at the local credit union, which is actually the Boystown Credit Union. I remember seeing the statement on the savings account, and it said they were paying 0.1% interest. It was under a percentage point. His comment was, well, at least I'm making money if it's in there. I said, are you sure? Then I had to explain inflation and some other things to him and he was very upset.
Jeremy Keil: Yeah, of course, and then there’s taxes too.
Aric Johnson: Oh, absolutely. We didn't even we didn't even touch taxes. So it’s very important that you understand that there is some risk to putting money into that savings account. There's very little risk, if any, but that means there's very little gain, if any.
Jeremy Keil: That's why you save for the long term. You understand whatever you need to buy today is most likely going to cost you more in the future, and you have to find something that's probably gonna keep up with those costs. The stock market itself and other things are going to help you out there in the long term. Well, we're talking about investing. A lot of people think it matters which stocks they are buying, and they're looking for the next great stock. How can I double my money or 10x my money? Should I be trading back and forth every day and paying attention to it? That’s just something that you can’t control in our opinion. You can’t control what the stock market is going to do. It doesn't matter too much how much you're going to trade every day or how much time you are going to spend picking the best stock investment you can find. You just can't control that stuff, so we'd rather focus on some other things that you can control.
Aric Johnson: Like what?
Jeremy Keil: Yeah. That first one is a risk. You can choose how much risk you want in the market. You're not beholden to exactly what the stock market is doing. What's interesting is when you dive into it, there's many different stock markets out there. There's no big thing called the stock market. So when you're investing, you need to spread your money out in different ways to make sure that you've got the right level of risk, and what's interesting about all that is a lot of people have more risk than they think they do.
Aric Johnson: Really?
Jeremy Keil: Yeah, it's unfortunate. I just read a story about this. They went to basically 100 different financial advisors, gave them an example of a client, and asked them what they would propose investment wise. Their answers ranged from 100% stock to 0% stock. So the unfortunate part of it is that even when you go to a professional, you need to understand what their definition of risk is. For us, we just like to figure out on a scale of one to ten, ten being the riskiest, how much risk someone is willing to take. Then we set up the portfolio to match that level of risk. Let’s say we come up with a score of six. You're kind of in the middle, but you want a little bit more than that. If you happen to have a lot more than 60% in the stock market, that's not a six out of ten. That might be a nine or ten out of ten. It’s just amazing. You have to talk to your advisor to make sure that they know how much risk you want to take. You want to know how much risk they're taking with your money. It's just unfortunate that a lot of advisors don't necessarily have the same definition of what risk is. When we're looking at risk, our main definition is how much money you have in the stock market versus how much money you have out of the stock market. A lot of advisers think, well, these are good stocks, so it's very conservative. Really? They're still stocks. You can still lose money. It doesn't matter if you call it good or not. You can still lose money in the stock market.
Aric Johnson: And we've seen good companies all of a sudden take a very bad turn, so that doesn't mean anything. There’s no safety net out there.
Jeremy Keil: Yeah. If something was a good stock at one point, if that is such a term, is it always going to be that way? You need to keep evaluating all of this. I have one really unfortunate story about risk. We met somebody who was interested in working with us. She had an advisor for years upon years, and she told us that she was below average risk. Just kind of below average. Maybe we would have thought she had 30, 40, or 50% in the stock market. When we looked at her portfolio of investments, we said, you have 100% in the stock market, and you're using borrowed money. You're actually borrowing money in your account to buy more stocks. So on a scale of one to ten she was like a 12 or 13. She wasn't the three, four or five that we thought she ought to be or that she said she was by saying, I'm below average risk, I don't want to take on too much risk. We said, you are beyond the max because you're actually borrowing money to go out and buy stocks. What's unfortunate about this is we met her in early 2008. All she had was her end of year 2007 statement. We said, work with us or not, but you gotta talk to your advisor because you are taking on so much risk. We followed up with her a year later in the middle of 2009 when we got the chance to meet with her again, and she had already lost over 80% of her money. It's just absolutely unfortunate. She thought she had conservative type investments, but you have to dig into it if an advisor says something is conservative, good, or safe. There is no such thing as a safe stock or conservative stock. I don't like those words. If you hear those words, just a dig deeper into it. That’s a sad story.
Aric Johnson: Yeah. That's heartbreaking. I mean, 80% of your entire retirement fund is just gone, and we all know what happened in ‘08 and ‘09. That really bothers me because to me that's not being a fiduciary period. We can get into this more on another podcast, and I know you’ve touched on this before, but I don't care what anybody says. That's terrible. So I know earlier you talked about spreading your money out, and I know that there's a big word for that. You talked about diversifying before. Can you touch on that a bit for us?
Jeremy Keil: Yeah, exactly. So the word is diversification. It is a fancy word for spreading things out. I’ll tell you a little story. My kids are five and eight, so they like to read Fancy Nancy. I don't know if anyone's read the Fancy Nancy books. They are great kids' books, but she likes to talk about big words and then she explains them. Unfortunately, a lot of times when we're in the investment world, we use big words but don't explain what they mean. So we're trying to explain a little bit here. Diversification is the fancy word for just spreading things out. It means not putting all your eggs in one basket. When you buy stocks, have different types of stocks. When you buy bonds, have different types of bonds. Sometimes you even have more than one bank account just because you have different reasons to have that. Diversify means spreading things out. It's one of the ways that you can make sure you have the right level of risk. So step one with this is decide how much risk you're willing to take. If you're saying that you are six out of ten, that probably means you want about 60% in the stock market and maybe 40% in other areas like the bond market, bank accounts, and different things like that. But you're not done yet. You need to spread things out and have different types of stocks and bonds. One thing we want to remind people of too is that a lot of times when you work at a company that has their own stock, you feel kind of beholden to that stock. It feels safe, and it's at home, right? This is where I go to work every day. It's a safe stock. So we see it all the time that people aren't well diversified. They don't have enough different types of stocks. Unfortunately, one of the biggest ways to hurt yourself is when you have your pension sitting around in a company you own a lot of stocks with, so one thing we very much encourage people to do is to understand how much risk they’re taking with the stock at the company you work with, and perhaps you ought to diversify. Find ways to diversify. There's some tax things to think about as well, so there's a deeper story there. But if you've got a lot of money in the stock where you're working at, that's something that you may want to consider diversifying. We had somebody that was considering working with us, and they had 80% of their money in the stock of the company that they worked for. We thought that from what they were telling us that it was way too much. You know, when they came through and talked about what they needed and what they were looking for, we thought that they had way too much stock in one place. We encouraged them to sell it. The stock was in like the mid fifties. That was the price range. He said, well, when it gets to $60, we'll sell it. It never got to $60. It dropped all the way down below $10. That was a lot of money for them to lose. Another individual had the same situation. Their stock was at $41.90. They said, when it hits $42, we'll sell it. I said, really? You're basing all of your retirement money on a dime? Let's think this through a little bit, and unfortunately, the same thing happened for them. The stock fell in half before they ended up selling it. That’s just an unfortunate situation that people hold on to the things that they're familiar with. There's actually a scientific term called familiarity bias. People think it's familiar. Oh, that's the bank that I go to every day. Oh, that's where my grandpa worked. That doesn't mean you should have all your money just in that one stock. So diversifying means different types of stocks and different types of bonds, and one big danger is when you do have your employer stock, the stock where you work, as a big portion of your investments.
Aric Johnson: Yeah, and side note real quick. I want to get into behavioral finance with you at some point. Can we do a podcast on that?
Jeremy Keil: Oh, I love behavioral finance. Yeah, absolutely. It’s just the idea of how people’s behavior goes against what science tells us.
Aric Johnson: Yeah, absolutely, so I want to do a podcast on that for sure, but I love how what you teach on this podcast is really basic wisdom, right? I mean, you said it: don't put all your eggs in one basket. You brought up a great point. You know, my grandpa worked at that store, so that feels safe. You know, that feels good to me. Look, your grandpa had an old pickup truck too, and it wasn't a good classic one that could be worth lots of money. It was just an old pickup truck. Is that as reliable as you think it is? Would you want that for your car instead of your nice, safe SUV or your nice luxury car. Do you want to stick with your car because it's a bit more reliable? Just because something is familiar doesn’t make it safe and reliable, so that was a great point. All right. What’s next?
Jeremy Keil: Well, the next thing you have to do is rebalancing. Diversifying is great. You should spread things out, but I bet you the next day that whatever percentages you put into the model and the way you want it to be set up are probably going to be different. The whole point of diversifying is that things go up and down at different points in time, and the way to get yourself back in alignment is called rebalancing. So let’s pretend you diversified into two different investments. All you have is two investments, and you put half your money in one and half your money in the other one. Tomorrow, it probably won't be exactly 50-50 because one might've gone up while one might’ve gone down. It’s the same thing the next month. You know, it keeps on changing to the point where you’re probably not at the starting point where you had 50-50 in those two investments. Maybe you're 60% in one and 40% in the other. That means your risk is different. Your diversification is different. You don't have what you signed up for. You need to get that back into alignment, and what you need to do is rebalance. In order to rebalance, if you only have the two investments, you take some profit from the one and you go buy the other one that happens to be lower. Sometimes people have a tough time making that happen. The next step we think is doing this automatically, but the reason why people have a tough time making this happen is they see that profit and they say, well, it might keep on going. That's my good stock, right? People ask us a lot of times, what's the stock market doing these days? What's this moderate fund doing? We like to say there is no such thing as “doing” in the stock market. There is only what it did. There's only past tense in the stock market. There is no doing. Just because it did 8% doesn't mean it will do 8%. When you've got that profit there, that's a good time to help you rebalance. When you grab some of that profit, go buy the stuff that went down a little bit. You're buying it on sale. It's a funny thing out here. We're in the Midwest, so we got Kohl's department stores. My wife, my mother-in-law, and my mom get so excited when they get that 30% off coupon coming in the mail from Kohl's because it's somewhat rare, right? You get the 15-20% off but one day you get the 30% off coupon, and you can't wait to go to Kohl's to go buy some stuff. Well, every so often the stock market gives you a 30% off coupon, right? Parts of your investments in your portfolio might be lower by that amount, and the only way to go get that sale is to go buy some more. When you're rebalancing, you're taking some money off the top from the things that went up, and you're using that money to go buy the things that happen to be lower. Perhaps it's on sale at the time, so hopefully you get a good deal out of it. But what’s more important when you're out of alignment is bringing your portfolio back into alignment so that you're at the same risk level that you originally signed up for and that you want to be at. That's what rebalancing does for you.
Aric Johnson: So how often should somebody be rebalancing?
Jeremy Keil: Yeah. That's a tough question. A lot of times people do it quarterly. A lot of times people do it once per year. I saw a study that said once every 18 months is the perfect time. I don't think there is a perfect time to do it, but every time you are reviewing your investments whether it is once, twice, or four times a year, you ought to look at what's up, what’s down, and how that affects your risk. If it moves your risk out of alignment, then rebalancing will bring that risk back into alignment. That's why a lot of times we recommend doing this automatically. We say that if you or your advisor is making the choice of whether you are going to buy or sell something, a lot of times our human nature takes over and says, no this stock that went up is going to keep on going and the stock that went down is going to keep on going down to zero, so I can’t sell that stock at all at a profit and I can’t buy that stock at a loss. When you're rebalancing and doing it automatically, you might not get the top point every time. You might not get the bottom price that you're buying it for every time, but doing that automatic rebalancing, whatever it's set for, is going to help you catch more wins by grabbing some profit and buying some more things that happened to be on sale than if you’re doing it manually.
Aric Johnson: Yeah, absolutely.
Jeremy Keil: One thing we really need to talk about too is that you notice that this is the fourth step in the five step retirement process. A lot of advisors and a lot of clients think that it should be the first step, right? Isn't that what financial planning is about, just trying to make more money? We don't think that's the answer, and that's because you can't control what the stock market's doing. You gotta control some of the things that you've got a lot of control over. That's why first we started out with figuring out how much you're going to spend in retirement. Second, we help you make those decisions on social security, pensions, and these other lifetime income areas that you get one shot at and from then on out you can't change it. You gotta focus on that next. Then we focused on how much money you need to be setting aside. That's the third part of this process: how much money do you need to have set aside out of the stock market? It's not until we've done all those areas and all those things that we start looking at your investments, and it's not a matter of picking the best stocks and it’s not a matter of being a better investment advisor than the next one or having a better portfolio. It's about the things you can control, and you can control how much risk you have up and down in the stock market. That lady I talked about earlier, she had control. She had the ability to look into her investments and see how much risk she had. She had the ability to talk with her advisor and to say that these investments are out of line. So you've got the ability to decide how much risk you might want to have in the market. You have the ability to spread things out. You have the ability to rebalance, and you have the ability to set it up automatically if you want to do it that way. So focus on the things that you can control, and we think investing is a very important piece of your retirement puzzle that's kind of down the line after you've done some other things.
Aric Johnson: Yeah, and the other thing that I would say is you have the ability to get a second opinion. I mean, that's what the lady did. She came and spoke with you. Now for her it was kind of too late in her situation because she was already in all of the way, but the other couple of examples that you gave were, I'm gonna wait till it gets to $60. I'm going to wait till it hits $42. They got a second opinion. They chose not to take it, but everybody listening to this has the ability to get a second opinion. Again it's funny because we're not going to dive into behavioral finance, but people say, I’m familiar with my advisor. I've been with my advisor for five to ten years. There's a relationship there. I am not going to say that you don't make friends with your clients because I know that you do. You have relationships with them. However, it is still business. If someone listening to this podcast is saying, you know, I've been with my advisor for ten years. I don't want to break off that relationship. I don't want to hurt his feelings or hurt her feelings. Here's the thing: your retirement is incredibly important. There's nothing wrong with getting a second opinion. I would love for them to do that. Jeremy, can they get a second opinion from you? I mean, I know the answer is yes, but how can they do that?
Aric Johnson: That'd be fantastic. What is the next podcast? What is the last one out of the five?
Jeremy Keil: Yeah, you got it. Well, hopefully everything we've talked about in steps one through four goes well. Hopefully you get all the money that you've ever wanted in retirement, but when that happens, you might have some money left over. We like to say you’ll either leave behind some money or you’ll leave behind some bills, and we want to help you be prepared for either scenario. There might be some money left over, and you have to figure out how that gets passed along, or perhaps there are some risks that you have in your portfolio and in your planning that might cause some bills to be left behind for your spouse, your kids, or whatever the situation is, so we'll be talking about estate planning and what different strategies go into that next time.
Aric Johnson: All right. I will look forward to it. Thank you so much Jeremy!
Jeremy Keil: Thank you, Aric! We'll talk soon.
Aric Johnson: All right, and thank you all for listening to the Retirement Revealed podcast with Jeremy Keil. If you have not subscribed to the podcast yet, please click the “Subscribe Now” button below. This way, when Jeremy comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. I'd love for you to do that. That'd be great. Again, thanks for listening today. For everyone at Keil Financial Partners, this is Aric Johnson reminding you to live your best day every day, and we'll see you next time.
Thank you for listening to the Retirement Revealed Podcast. Click on the subscribe button below to be notified when new episodes become available. Visit Retirement-Revealed.com to learn more. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.